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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
(Mark One)
☒ QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended June 25, 2022
OR
☐ TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
Commission file number: 001-39898
Driven Brands Holdings Inc.
(Exact name of Registrant as specified in its charter)
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Delaware |
(State or other jurisdiction of incorporation or organization) |
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47-3595252 |
(I.R.S. Employer Identification No.) |
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440 South Church Street, Suite 700 |
Charlotte, North Carolina |
(Address of principal executive offices) |
Registrant’s telephone number, including area code: (704) 377-8855
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Title of each class |
Common Stock, $0.01 par value |
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Name of each exchange on which registered |
The Nasdaq Global Select Market |
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes ☒ No ☐
Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit such files). Yes ☒ No ☐
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company or an emerging growth company. See definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company,” and “emerging growth company” in Rule 12b-2 of the Exchange Act.
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Large accelerated filer ☐ |
Non-accelerated filer ☒ |
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Accelerated filer ☐ |
Small reporting company ☐ |
Emerging growth company ☐ |
Indicate by check mark whether the registrant has filed a report on and attestation to its management’s assessment of the effectiveness of its
internal control over financial reporting under Section 404(b) of the Sarbanes-Oxley Act (15 U.S.C. 7262(b)) by the registered public
accounting firm that prepared or issued its audit report. ☐
If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act ☐
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Act). Yes ☐ No ☒
As of August 1, 2022, the Registrant had 167,477,320 shares of Common Stock outstanding.
Driven Brands Holdings Inc.
Table of Contents
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PART I. FINANCIAL INFORMATION | |
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Forward-Looking Statements
This Quarterly Report on Form 10-Q contains forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995. These forward-looking statements are generally identified by the use of forward-looking terminology, including the terms “anticipate,” “believe,” “continue,” “could,” “estimate,” “expect,” “intend,” “likely,” “may,” “plan,” “possible,” “potential,” “predict,” “project,” “should,” “target,” “will,” “would” and, in each case, their negative or other various or comparable terminology. All statements other than statements of historical facts contained in this Quarterly Report, including statements regarding our strategy, future operations, future financial position, future revenue, projected costs, prospects, plans, objectives of management, and expected market growth are forward-looking statements. In particular, forward-looking statements include, among other things, statements relating to: (i) our strategy, outlook and growth prospects; (ii) our operational and financial targets and dividend policy; (iii) general economic trends and trends in the industry and markets; and (iv) the competitive environment in which we operate. Forward-looking statements are not based on historical facts, but instead represent our current expectations and assumptions regarding our business, the economy and other future conditions, and involve known and unknown risks, uncertainties and other important factors that may cause our actual results, performance, or achievements to be materially different from any future results, performance, or achievements expressed or implied by the forward-looking statements. It is not possible to predict or identify all such risks. These risks include, but are not limited to, the risk factors that are described under the section titled “Risk Factors” in our Annual Report on Form 10-K for the fiscal year ended December 25, 2021, as supplemented by Item 1A. Risk Factors section in this Quarterly Report on Form 10-Q as well as in our other filings with the Securities and Exchange Commission, which are available on its website at www.sec.gov. Given these uncertainties, you should not place undue reliance on these forward-looking statements.
Forward-looking statements represent our estimates and assumptions only as of the date on which they are made, and we undertake no obligation to update or review publicly any forward-looking statements, whether as a result of new information, future events or otherwise, except as required by law.
Part I - Financial Information
Item 1. Financial Statements (Unaudited)
DRIVEN BRANDS HOLDINGS INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS (Unaudited)
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| | Three months ended | | Six months ended | | |
(in thousands, except per share amounts) | | June 25, 2022 | | June 26, 2021 | | June 25, 2022 | | June 26, 2021 | | | | |
Revenue: | | | | | | | | | | | | |
Franchise royalties and fees | | $ | 44,850 | | | $ | 37,873 | | | $ | 82,738 | | | $ | 68,287 | | | | | |
Company-operated store sales | | 323,885 | | | 206,198 | | | 616,276 | | | 390,053 | | | | | |
Independently-operated store sales | | 54,942 | | | 56,379 | | | 118,031 | | | 112,542 | | | | | |
Advertising contributions | | 22,091 | | | 19,648 | | | 41,789 | | | 36,903 | | | | | |
Supply and other revenue | | 62,856 | | | 54,730 | | | 118,113 | | | 96,462 | | | | | |
Total revenue | | 508,624 | | | 374,828 | | | 976,947 | | | 704,247 | | | | | |
Operating Expenses: | | | | | | | | | | | | |
Company-operated store expenses | | 192,939 | | | 123,820 | | | 370,806 | | | 236,575 | | | | | |
Independently-operated store expenses | | 28,843 | | | 30,792 | | | 62,142 | | | 61,900 | | | | | |
Advertising expenses | | 22,091 | | | 19,648 | | | 41,789 | | | 36,903 | | | | | |
Supply and other expenses | | 35,800 | | | 29,598 | | | 68,574 | | | 52,087 | | | | | |
Selling, general, and administrative expenses | | 97,977 | | | 77,935 | | | 190,197 | | | 146,984 | | | | | |
Acquisition costs | | 3,338 | | | 389 | | | 7,656 | | | 2,038 | | | | | |
Store opening costs | | 666 | | | 405 | | | 1,172 | | | 694 | | | | | |
Depreciation and amortization | | 38,087 | | | 26,423 | | | 71,110 | | | 50,275 | | | | | |
Trade name impairment charge | | 125,450 | | | — | | | 125,450 | | | — | | | | | |
Asset impairment charges and lease terminations | | (882) | | | 2,178 | | | 16 | | | 3,431 | | | | | |
Total operating expenses | | 544,309 | | | 311,188 | | | 938,912 | | | 590,887 | | | | | |
Operating income (loss) | | (35,685) | | | 63,640 | | | 38,035 | | | 113,360 | | | | | |
Other expenses, net: | | | | | | | | | | | | |
Interest expense, net | | 26,270 | | | 16,612 | | | 51,623 | | | 34,702 | | | | | |
Loss (gain) on foreign currency transactions | | 13,937 | | | (5,229) | | | 14,908 | | | 5,282 | | | | | |
Loss on debt extinguishment | | — | | | 78 | | | — | | | 45,576 | | | | | |
Other expense, net | | 40,207 | | | 11,461 | | | 66,531 | | | 85,560 | | | | | |
Income (loss) before taxes | | (75,892) | | | 52,179 | | | (28,496) | | | 27,800 | | | | | |
Income tax expense (benefit) | | (18,848) | | | 17,011 | | | (5,880) | | | 12,565 | | | | | |
Net income (loss) | | (57,044) | | | 35,168 | | | (22,616) | | | 15,235 | | | | | |
Net income (loss) attributable to non-controlling interest | | — | | | (36) | | | (15) | | | (30) | | | | | |
Net income (loss) attributable to Driven Brands Holdings Inc. | | $ | (57,044) | | | $ | 35,204 | | | $ | (22,601) | | | $ | 15,265 | | | | | |
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Earnings (loss) per share: | | | | | | | | | | | | |
Basic | | $ | (0.34) | | | $ | 0.21 | | | $ | (0.14) | | | $ | 0.09 | | | | | |
Diluted | | $ | (0.34) | | | $ | 0.21 | | | $ | (0.14) | | | $ | 0.09 | | | | | |
Weighted average shares outstanding | | | | | | | | | | | | |
Basic | | 162,781 | | | 162,626 | | | 162,772 | | | 158,727 | | | | | |
Diluted | | 162,781 | | | 166,512 | | | 162,772 | | | 162,271 | | | | | |
The accompanying notes are an integral part of these consolidated financial statements.
DRIVEN BRANDS HOLDINGS INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (LOSS) (Unaudited)
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| | | Three months ended | | Six months ended |
(in thousands) | | | | | June 25, 2022 | | June 26, 2021 | | June 25, 2022 | | June 26, 2021 |
Net income (loss) | | | | | $ | (57,044) | | | $ | 35,168 | | | $ | (22,616) | | | $ | 15,235 | |
Other comprehensive income (loss): | | | | | | | | | | | |
Foreign currency translation adjustment | | | | | (42,114) | | | 11,411 | | | (47,688) | | | 2,168 | |
Unrealized gain from cash flow hedges, net of tax | | | | | (225) | | | — | | | (93) | | | 30 | |
Defined benefit pension plan actuarial gain, net of tax | | | | | 7 | | | — | | | 7 | | | 128 | |
Other comprehensive income (loss), net | | | | | (42,332) | | | 11,411 | | | (47,774) | | | 2,326 | |
Total comprehensive income (loss) | | | | | (99,376) | | | 46,579 | | | (70,390) | | | 17,561 | |
Comprehensive income (loss) attributable to non-controlling interests | | | | | (19) | | | (1) | | | (21) | | | 39 | |
Comprehensive income (loss) attributable to Driven Brands Holdings Inc. | | | | | $ | (99,357) | | | $ | 46,580 | | | $ | (70,369) | | | $ | 17,522 | |
The accompanying notes are an integral part of these consolidated financial statements.
DRIVEN BRANDS HOLDINGS INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS (Unaudited)
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(in thousands, except share and per share amounts) | June 25, 2022 | | December 25, 2021 |
Assets | | | |
Current assets: | | | |
Cash and cash equivalents | $ | 197,853 | | | $ | 523,414 | |
Restricted cash | 792 | | | 792 | |
Accounts and notes receivable, net | 178,201 | | | 117,903 | |
Inventory | 53,124 | | | 46,990 | |
Prepaid and other assets | 47,964 | | | 24,326 | |
Income tax receivable | 5,070 | | | 6,867 | |
Assets held for sale | 3,275 | | | 3,275 | |
Advertising fund assets, restricted | 55,596 | | | 45,360 | |
Total current assets | 541,875 | | | 768,927 | |
Notes receivable, net | 5,092 | | | 3,182 | |
Property and equipment, net | 1,481,064 | | | 1,350,984 | |
Operating lease right-of-use assets | 1,031,731 | | | 995,625 | |
Deferred commissions | 10,738 | | | 10,567 | |
Intangibles, net | 733,469 | | | 816,183 | |
Goodwill | 2,108,002 | | | 1,910,392 | |
Deferred tax assets | 1,360 | | | 1,509 | |
Total assets | $ | 5,913,331 | | | $ | 5,857,369 | |
Liabilities and shareholders' equity | | | |
Current liabilities: | | | |
Accounts payable | $ | 115,424 | | | $ | 83,033 | |
Accrued expenses and other liabilities | 253,742 | | | 297,620 | |
Income tax payable | 30,021 | | | 11,054 | |
Current portion of long term debt | 23,590 | | | 26,044 | |
Income tax receivable liability | 24,255 | | | 24,255 | |
Advertising fund liabilities | 30,264 | | | 26,441 | |
Total current liabilities | 477,296 | | | 468,447 | |
Long-term debt | 2,464,909 | | | 2,356,320 | |
Deferred tax liabilities | 223,336 | | | 257,067 | |
Operating lease liabilities | 969,598 | | | 931,604 | |
Income tax receivable liability | 131,715 | | | 131,715 | |
Deferred revenue | 39,829 | | | 37,576 | |
Long-term accrued expenses and other liabilities | 23,188 | | | 29,398 | |
Total liabilities | 4,329,871 | | | 4,212,127 | |
Commitments and contingencies | | | |
Common stock, $0.01 par value, 900 million shares authorized: and 168 million and 167 million shares issued at June 25, 2022 and December 25, 2021. | 1,677 | | | 1,674 | |
Additional paid-in capital | 1,614,927 | | | 1,605,890 | |
Retained earnings | 19,006 | | | 41,607 | |
Accumulated other comprehensive loss | (52,796) | | | (5,028) | |
Total shareholders’ equity attributable to Driven Brands Holdings Inc. | 1,582,814 | | | 1,644,143 | |
Non-controlling interests | 646 | | | 1,099 | |
Total shareholders' equity | 1,583,460 | | | 1,645,242 | |
Total liabilities and shareholders' equity | $ | 5,913,331 | | | $ | 5,857,369 | |
The accompanying notes are an integral part of these consolidated financial statements.
DRIVEN BRANDS HOLDINGS INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF SHAREHOLDERS’/MEMBERS’ EQUITY (Unaudited)
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in thousands | Common stock | | Additional paid-in capital | | Retained earnings | | Accumulated other comprehensive income (loss) | | Non-controlling interests | | Total shareholders'/members' equity |
Balance as of December 26, 2020 | $ | 565 | | | $ | 1,055,172 | | | $ | 31,975 | | | $ | 16,528 | | | $ | 2,120 | | | $ | 1,106,360 | |
Net income (loss) | — | | | — | | | (19,939) | | | — | | | 7 | | | (19,932) | |
Other comprehensive loss | — | | | — | | | — | | | (9,085) | | | — | | | (9,085) | |
Equity-based compensation expense | — | | | 983 | | | — | | | — | | | — | | | 983 | |
Issuance of common stock upon initial public offering, net of underwriting discounts and commissions | 1,082 | | | 660,418 | | | — | | | — | | | — | | | 661,500 | |
Common stock issued upon underwriter's exercise of over-allotment | 48 | | | 99,177 | | | — | | | — | | | — | | | 99,225 | |
Repurchase of common stock | (21) | | | (42,956) | | | — | | | — | | | — | | | (42,977) | |
Exercise of stock options | — | | | 25 | | | — | | | — | | | — | | | 25 | |
Establishment of income tax receivable liability | — | | | (155,970) | | | — | | | — | | | — | | | (155,970) | |
IPO fees | — | | | (14,757) | | | — | | | — | | | — | | | (14,757) | |
Other | — | | | — | | | — | | | — | | | (63) | | | (63) | |
Balance as of March 27, 2021 | $ | 1,674 | | | $ | 1,602,092 | | | $ | 12,036 | | | $ | 7,443 | | | $ | 2,064 | | | $ | 1,625,309 | |
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Net income (loss) | — | | | — | | | 35,204 | | | — | | | (36) | | | 35,168 | |
Other comprehensive loss | — | | | — | | | — | | | 11,412 | | | (1) | | | 11,411 | |
Equity-based compensation expense | — | | | 1,028 | | | — | | | — | | | — | | | 1,028 | |
At Pac divestiture | — | | | — | | | — | | | — | | | (948) | | | (948) | |
Other | — | | | (25) | | | — | | | (1) | | | — | | | (26) | |
Balance as of June 26, 2021 | $ | 1,674 | | | $ | 1,603,095 | | | $ | 47,240 | | | $ | 18,854 | | | $ | 1,079 | | | $ | 1,671,942 | |
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Balance as of December 25, 2021 | $ | 1,674 | | | $ | 1,605,890 | | | $ | 41,607 | | | $ | (5,028) | | | $ | 1,099 | | | $ | 1,645,242 | |
Net income (loss) | — | | | — | | | 34,443 | | | — | | | $ | (15) | | | 34,428 | |
Other comprehensive income (loss) | — | | | — | | | — | | | (5,455) | | | 13 | | | (5,442) | |
Equity based compensation expense | — | | | 2,618 | | | — | | | — | | | — | | | 2,618 | |
Stock issued related to Employee Stock Purchase Plan | 1 | | | 2,091 | | | — | | | — | | | — | | | 2,092 | |
Tax withholding on stock option exercises | — | | | (14) | | | — | | | — | | | — | | | (14) | |
Divestiture of Denmark car wash operations | — | | | — | | | — | | | — | | | (432) | | | (432) | |
Balance as of March 26, 2022 | $ | 1,675 | | | $ | 1,610,585 | | | $ | 76,050 | | | $ | (10,483) | | | $ | 665 | | | $ | 1,678,492 | |
Net loss | — | | | — | | | (57,044) | | | — | | | — | | | (57,044) | |
Other comprehensive loss | — | | | — | | | — | | | (42,313) | | | (19) | | | (42,332) | |
Equity based compensation expense | — | | | 4,233 | | | — | | | — | | | — | | | 4,233 | |
Stock option exercised | 2 | | | 109 | | | — | | | — | | | — | | | 111 | |
Balance as of June 25, 2022 | $ | 1,677 | | | $ | 1,614,927 | | | $ | 19,006 | | | $ | (52,796) | | | $ | 646 | | | $ | 1,583,460 | |
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The accompanying notes are an integral part of these consolidated financial statements.
DRIVEN BRANDS HOLDINGS INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS (Unaudited)
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| Six months ended |
(in thousands) | June 25, 2022 | | June 26, 2021 |
Net income (loss) | $ | (22,616) | | | $ | 15,235 | |
Adjustments to reconcile net income (loss) to net cash provided by operating activities: | | | |
Depreciation and amortization | 71,110 | | | 50,275 | |
Trade name impairment | 125,450 | | | — | |
Non-cash lease cost | 35,049 | | | 37,938 | |
Loss on foreign denominated transactions | 14,908 | | | 5,707 | |
Gain on foreign currency derivatives | — | | | (425) | |
Bad debt expense | 936 | | | 1,739 | |
Asset impairment costs | 16 | | | 3,431 | |
Amortization of deferred financing costs and bond discounts | 4,565 | | | 3,619 | |
Benefit (provision) for deferred income taxes | (31,908) | | | 4,742 | |
Loss on extinguishment of debt | — | | | 45,576 | |
Other, net | (1,925) | | | 1,375 | |
Changes in assets and liabilities, net of acquisitions: | | | |
Accounts and notes receivable, net | (61,461) | | | (24,174) | |
Inventory | (6,899) | | | (396) | |
Prepaid and other assets | (19,082) | | | (20,885) | |
Advertising fund assets and liabilities, restricted | (1,321) | | | 12,548 | |
Deferred commissions | (178) | | | (809) | |
Deferred revenue | 497 | | | 2,994 | |
Accounts payable | 20,209 | | | 3,860 | |
Accrued expenses and other liabilities | (45,950) | | | 9,707 | |
Income tax receivable | 19,640 | | | 3,665 | |
Operating lease liabilities | (25,651) | | | (31,034) | |
Cash provided by operating activities | 75,389 | | | 124,688 | |
Cash flows from investing activities: | | | |
Capital expenditures | (148,763) | | | (46,222) | |
Cash used in business acquisitions, net of cash acquired | (394,388) | | | (205,556) | |
Proceeds from sale-leaseback transactions | 56,083 | | | 49,166 | |
Proceeds from sale of company-operated stores | — | | | 5,775 | |
Proceeds from disposition of car wash operations | 1,551 | | | — | |
Proceeds from disposal of property and equipment | 632 | | | — | |
Cash used in investing activities | (484,885) | | | (196,837) | |
Cash flows from financing activities: | | | |
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Payment of debt extinguishment and issuance costs | — | | | (2,408) | |
Repayment of long-term debt | (9,682) | | | (712,649) | |
Proceeds from revolving lines of credit and short-term debt | 105,000 | | | 213,800 | |
Repayments of revolving lines of credit and short-term debt | — | | | (152,800) | |
Repayment of principal portion of finance lease liability | (1,156) | | | (1,127) | |
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Proceeds from initial public offering, net of underwriting discounts | — | | | 661,500 | |
Net proceeds from underwriters' exercise of over-allotment option | — | | | 99,225 | |
Repurchases of common stock | — | | | (43,040) | |
Payment for termination of interest rate swaps | — | | | (21,826) | |
Stock option exercises | 188 | | | — | |
Other, net | (36) | | | 152 | |
Cash provided by financing activities | 94,314 | | | 40,827 | |
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Effect of exchange rate changes on cash | (4,454) | | | 1,813 | |
Net change in cash, cash equivalents, restricted cash, and cash included in advertising fund assets, restricted | (319,636) | | | (29,509) | |
Cash and cash equivalents, beginning of period | 523,414 | | | 172,611 | |
Cash included in advertising fund assets, restricted, beginning of period | 38,586 | | | 19,369 | |
Restricted cash, beginning of period | 792 | | | 15,827 | |
Cash, cash equivalents, restricted cash, and cash included in advertising fund assets, restricted, beginning of period | 562,792 | | | 207,807 | |
Cash and cash equivalents, end of period | 197,853 | | | 147,257 | |
Cash included in advertising fund assets, restricted, end of period | 44,511 | | | 30,882 | |
Restricted cash, end of period | 792 | | | 159 | |
Cash, cash equivalents, restricted cash, and cash included in advertising fund assets, restricted, end of period | $ | 243,156 | | | $ | 178,298 | |
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Supplemental cash flow disclosures - non-cash items: | | | |
Accrued capital expenditures, end of period | $ | 5,464 | | | $ | 5,772 | |
Supplemental cash flow disclosures - cash paid for: | | | |
Interest | $ | 51,491 | | | $ | 38,966 | |
Income taxes | $ | 5,457 | | | $ | 5,531 | |
The accompanying notes are an integral part of these consolidated financial statements.
DRIVEN BRANDS HOLDINGS INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Unaudited)
Note 1—Description of Business
Description of Business
Driven Brands Holdings Inc., together with its subsidiaries (collectively, the “Company”), is a Delaware corporation and is the parent holding company of Driven Brands, Inc. and Shine Holdco (UK) Limited (collectively, “Driven Brands”). Driven Brands is the largest automotive services company in North America with a growing and highly-franchised base of more than 4,600 franchised, independently-operated, and company-operated locations across 49 U.S. states and 14 other countries. The Company has a portfolio of highly recognized brands, including Take 5 Oil Change®, Meineke Car Care Centers®, MAACO®, CARSTAR®, and 1-800-Radiator & A/C® that compete in the automotive services industry. Approximately 77% of the Company’s locations are franchised or independently-operated.
Initial Public Offering and Secondary Offering in 2021
On January 14, 2021, the Company completed an initial public offering (the “IPO”) of approximately 32 million shares of common stock at $22 per share. On February 10, 2021, the Company’s underwriters exercised their over-allotment option to purchase approximately 5 million additional shares of common stock. The Company received total proceeds of $761 million from these transactions, net of the underwriting discounts and commissions.
The Company used the proceeds from the IPO, along with cash on hand, to fully repay the term loans and revolving credit facility assumed as part of the acquisition of International Car Wash Group (“ICWG”) in 2020 (collectively, the “Car Wash Senior Credit Facilities”), which totaled $725 million with interest and fees. The Company recognized a $46 million loss on debt extinguishment for six months ended June 26, 2021 related to this settlement, primarily related to the write-off of the unamortized discount. The Company cancelled the interest rate and cross currency swaps associated with these debt agreements as part of the settlement. The Company also used $43 million in proceeds to purchase approximately 2 million shares of common stock from certain of our existing shareholders.
On August 2, 2021, the Company filed a Registration Statement on Form S-1 for a secondary offering of approximately 12 million shares of common stock at $29.50 per share by certain of the Company’s stockholders, Driven Equity LLC and RC IV Cayman ICW Holdings LLC, each of which is a related party of Roark Capital Management, LLC. The Company did not sell any common stock in the offering and did not receive any proceeds from the offering. On September 8, 2021, the underwriters for the secondary offering exercised a portion of their over-allotment option and purchased 881,393 additional shares of common stock. The Company did not receive any proceeds from the exercise of the over-allotment option.
Income Tax Receivable Agreement
The Company expects to be able to utilize certain tax benefits which are related to periods prior to the effective date of the Company’s IPO and are attributed to current and former shareholders. The Company previously entered into an income tax receivable agreement which provides our pre-IPO shareholders with the right to receive payment of 85% of the amount of cash savings, if any, in U.S. and Canadian federal, state, local and provincial income tax that the Company will actually realize. The income tax receivable agreement is effective as of the date of the Company’s IPO. The Company has recorded a total liability of $156 million as of June 25, 2022 and December 25, 2021, of which $24 million and $132 million are recorded under current and non-current liabilities, respectively.
Stock Split
On January 14, 2021, the Company’s shareholders approved an amendment to the Company’s certificate of incorporation (the "Amendment") to effect an implied 88,990-for-one stock split of shares of the Company’s outstanding
common stock. In addition, the Amendment increased the number of authorized shares of the Company's stock from 10,000 shares to 1 billion shares (900 million shares of common stock and 100 million shares of preferred stock). All share and per-share data in the consolidated financial statements and footnotes has been retroactively adjusted to reflect the stock split for all periods presented. The Company does not have any shares of preferred stock outstanding.
Note 2— Summary of Significant Accounting Policies
Fiscal Year
The Company operates and reports financial information on a 52- or 53-week year with the fiscal year ending on the last Saturday in December and fiscal quarters ending on the 13th Saturday of each quarter (or 14th Saturday when applicable with respect to the fourth fiscal quarter). The three and six months ended June 25, 2022 and June 26, 2021, each consist of 13 weeks and 26 weeks, respectively. The Car Wash segment is currently consolidated based on a calendar month end.
Basis of Presentation
The unaudited consolidated financial statements have been prepared in accordance with accounting principles generally accepted in the United States of America ("U.S. GAAP") for interim financial information and pursuant to the rules and regulations of the Securities and Exchange Commission. In the opinion of management, the unaudited interim financial data includes all adjustments, consisting only of normal recurring adjustments, necessary for a fair statement of the results of operations, balance sheet, cash flows and shareholders’ equity for the interim periods presented. The adjustments include the accounts of the Company and its wholly-owned subsidiaries. All significant intercompany balances and transactions have been eliminated in consolidation.
These interim consolidated financial statements should be read in conjunction with the consolidated financial statements as of and for the year ended December 25, 2021. Certain information and note disclosures normally included in the financial statements prepared in accordance with U.S. GAAP have been condensed or omitted pursuant to such rules and regulations. The results of operations for the three and six months ended June 25, 2022 may not be indicative of the results to be expected for any other interim period or the year ending December 31, 2022.
Use of Estimates
The preparation of financial statements in conformity with U.S. GAAP requires management to make estimates and assumptions that affect the amounts reported in the consolidated financial statements and the related notes to the consolidated financial statements. Estimates are based upon historical factors, current circumstances and the experience and judgment of the Company’s management. Management evaluates its estimates and assumptions on an ongoing basis and may employ outside experts to assist in its evaluations. Changes in such estimates, based on more accurate future information, or different assumptions or conditions, may affect amounts reported in future periods.
Deferred IPO costs
Costs incurred that are directly related to the IPO, such as legal and accounting fees, registration fees, printing expenses, and other similar fees and expenses, totaling $9 million were capitalized and included within prepaid and other assets as of December 26, 2020. Upon completion of the IPO, the Company reclassified these costs, as well as an additional $6 million of IPO costs incurred during the six months ended June 26, 2021 to Additional paid-in capital within the statement of Shareholders’/members’ equity.
Fair Value of Financial Instruments
Financial assets and liabilities are categorized, based on the inputs to the valuation technique, into a three-level fair value hierarchy. The fair value hierarchy gives the highest priority to the quoted prices in active markets for identical assets and liabilities and the lowest priority to unobservable inputs. Observable market data, when available, is required to be used in making fair value measurements. When inputs used to measure fair value fall within different levels of the hierarchy, the level within which the fair value measurement is categorized is based on the lowest level input that is significant to the fair value measurement.
The Company classifies and discloses assets and liabilities carried at fair value in one of the following three categories:
•Level 1: Inputs are quoted prices (unadjusted) in active markets for identical assets or liabilities that the reporting entity has the ability to access at the measurement date;
•Level 2: Inputs are inputs other than quoted prices included within Level 1 that are observable for the asset or liability, either directly or indirectly; or
•Level 3: Inputs are unobservable inputs for the asset or liability. Unobservable inputs are used to measure fair value to the extent that observable inputs are not available, thereby allowing for situations in which there is little, if any, market activity for the asset or liability at the measurement date.
Financial assets and liabilities measured at fair value on a recurring basis as of June 25, 2022 and December 25, 2021 are summarized as follows:
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Items Measured at Fair Value at June 25, 2022 |
(in thousands) | Level 1 | | Level 2 | | Total |
Mutual fund investments held in rabbi trust | $ | 766 | | | $ | — | | | $ | 766 | |
Foreign currency derivative assets designated as hedging instruments | $ | — | | | $ | 1,030 | | | $ | 1,030 | |
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Foreign currency derivative liabilities designated as hedging instruments | $ | — | | | $ | 304 | | | $ | 304 | |
Foreign currency derivative liabilities not designated as hedging instruments | $ | — | | | $ | 1,528 | | | $ | 1,528 | |
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Items Measured at Fair Value at December 25, 2021 |
(in thousands) | Level 1 | | Level 2 | | Total |
Mutual fund investments held in rabbi trust | $ | 976 | | | $ | — | | | $ | 976 | |
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Foreign currency derivative liabilities designated as hedging instruments | $ | — | | | $ | 536 | | | $ | 536 | |
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The fair value of the Company’s foreign currency derivative instruments are derived from valuation models, which use Level 2 observable inputs such as quoted market prices, interest rates and forward yield curves. Derivative assets are included in Prepaid and other assets or Notes receivable, net in the consolidated balance sheet depending on the remaining period to maturity. Derivative liabilities not designated as a hedging instrument are included in Accrued expenses and other liabilities in the consolidated balance Sheet. Derivative liabilities designated as a hedging instrument are included in long-term accrued expenses and other liabilities in the consolidated balance sheet.
The carrying values of cash, restricted cash, and receivables included in the consolidated balance sheet approximate their fair value. The fair value of long-term debt is estimated based on Level 2 inputs using discounted cash flows and market-based expectations for interest rates, credit risk and contractual terms of the debt agreements.
The carrying value and estimated fair value of total long-term debt were as follows:
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| June 25, 2022 | | December 25, 2021 |
(in thousands) | Carrying value | | Estimated fair value | | Carrying value | | Estimated fair value |
Long-term debt | $ | 2,488,499 | | | $ | 2,311,046 | | | $ | 2,382,364 | | | $ | 2,411,987 | |
Accumulated Other Comprehensive Income (Loss)
The following tables present changes in each component of accumulated other comprehensive income (loss), net of tax:
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| Three months ended June 25, 2022 |
(in thousands) | Foreign currency translation adjustment | | Cash flow hedges | | Defined benefit pension plan | | Accumulated other comprehensive income (loss) |
Balance as of March 26, 2022 | $ | (9,770) | | | $ | (626) | | | $ | (87) | | | $ | (10,483) | |
Net change | (42,095) | | | (225) | | | 7 | | | (42,313) | |
Balance as of June 25, 2022 | $ | (51,865) | | | $ | (851) | | | $ | (80) | | | $ | (52,796) | |
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| Three months ended June 26, 2021 |
(in thousands) | Foreign currency translation adjustment | | Cash flow hedges | | Defined benefit pension plan | | Accumulated other comprehensive income (loss) |
Balance at March 27, 2021 | $ | 7,591 | | | $ | (57) | | | $ | (91) | | | $ | 7,443 | |
Net change | 11,411 | | | — | | | — | | | 11,411 | |
Balance as of June 26, 2021 | $ | 19,002 | | | $ | (57) | | | $ | (91) | | | $ | 18,854 | |
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| Six months ended June 25, 2022 |
(in thousands) | Foreign currency translation adjustment | | Cash flow hedges | | Defined benefit pension plan | | Accumulated other comprehensive income (loss) |
Balance as of December 25, 2021 | $ | (4,183) | | | $ | (758) | | | $ | (87) | | | $ | (5,028) | |
Net change | (47,682) | | | (93) | | | 7 | | | (47,768) | |
Balance as of June 25, 2022 | $ | (51,865) | | | $ | (851) | | | $ | (80) | | | $ | (52,796) | |
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| Six months ended June 26, 2021 |
(in thousands) | Foreign currency translation adjustment | | Cash flow hedges | | Defined benefit pension plan | | Accumulated other comprehensive income (loss) |
Balance as of December 26, 2020 | $ | 16,834 | | | $ | (87) | | | $ | (219) | | | $ | 16,528 | |
Net change | 2,168 | | | 30 | | | 128 | | | 2,326 | |
Balance as of June 26, 2021 | $ | 19,002 | | | $ | (57) | | | $ | (91) | | | $ | 18,854 | |
Recently Issued Accounting Standards
In March 2020, the FASB issued ASU 2020-04, Reference Rate Reform (Topic 848): Facilitation of the Effects of Reference Rate Reform on Financial Reporting. This ASU provides optional expedients and exceptions for applying generally accepted accounting principles to contracts, hedging relationships, and other transactions affected by reference rate reform if certain criteria are met. In response to the concerns about structural risks of interbank offered rates and, particularly, the risk of cessation of LIBOR, regulators in several jurisdictions around the world have undertaken reference rate reform initiatives to identify alternative reference rates that are more observable or transaction based and less susceptible to manipulation. The ASU provides companies with optional guidance to ease the potential accounting burden associated with transitioning away from reference rates that are expected to be discontinued. This guidance is effective immediately and the amendments may be applied prospectively through December 31, 2022. The Company is evaluating the impact of adopting this new accounting guidance and does not believe it will have a material impact on the Company’s consolidated financial statements.
Note 3—Acquisitions and Dispositions
The Company strategically acquires companies and assets in order to increase its footprint and offer products and services that diversify its existing offerings. These acquisitions are accounted for as either business combinations or asset acquisitions, whereby the purchase price is allocated to the assets acquired and liabilities assumed, based on their fair values as of the date of the acquisition.
2022 Acquisitions
The Company completed 12 acquisitions in the Car Wash segment during the six months ended June 25, 2022, representing 17 sites, which were deemed to be business combinations. The aggregate cash consideration for these acquisitions, net of cash acquired and liabilities assumed, was approximately $164.7 million. On June 14, 2022, the Car Wash segment acquired Jimmy Clean Car Wash, which was comprised of 3 sites for a total consideration of $31.9